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GLOSSARY FOR CONSUMER LOANS

Acceptance Letter
The letter that a borrower eagerly waits to fill up. Once the loan is issued by the way of sanction letter, the applicant communicates his willingness to accept the loan by way of an acceptance letter.

Advance EMI
Pay back time! Number of equated installments in the form of post dated cheques, paid out in advance at the time of disbursement of loan.

Amortization
Loan payment calculated to pay off the debt at the end of a fixed period, including interest on the outstanding balance.

Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.

Business Days
The number of days that the lender takes to process an application for a loan. Find out from your institution to find out what days it counts as business days.

Category
The finance companies classify the borrowers into different categories like salaried or self-employed. The eligibility and the documentation differ with the different categories.

Closing
The meeting between the buyer and the lender where the funds legally change hands. Also called settlement.

Commitment
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the stated conditions.

Commitment Fee
Much like other commitments, which if one screws up one gets the short end of the straw. It is an interest, which is charged if you do not draw the sanctioned loan amount within a period of 6-7 months. The interest rate is usually about 1-2%.

Credit Appraisal
The IMPORTANT PEOPLE! Every Finance Company has its own panel of credit appraisal officers who process applications. They take into account various factors like income of the applicants, number of dependents, monthly expenditure, repayment capacity, employment history, number of years service left over and other factors, which affect the credit rating of the borrower. Proof of income will also be verified for the purpose of approval of loan. The time taken for receipt of such information is crucial since it affects the length of time required for a loan approval.

Down Payment
Wonder why it’s called down payment when it has to be paid up-front? Finance companies normally give loans up to 80-85% of the value of the item. The balance would have to be paid by the buyer, as a payment before he draws on the loan amount.

Equal Monthly Installment (EMI)
EMI or Equated Monthly Installments, refers to the fixed sum of money that you will be paying to the finance company every month.
The EMI comprises both interest and principal repayment. The size of the EMI depends on the quantum of loan, interest rate applicable and the term of the loan.

Eligibility
This is a standardized criteria specified by lenders to evaluate willingness and ability of a customer to qualify for a loan scheme

Estimation
Process to evaluate the worth in money of an asset/product

Exposure
The loan amount as against the value of the asset/product. Try avoiding an indecent exposure, it’s better for your health as well!

Flat Rate
Percentage representation of the amount of annual interest on the total loan amount.

Guarantee
That party in the deed who is the buyer or recipient.

Grantor
That party in the deed who is the seller or giver.

Gross Monthly Income The total amount the borrower earns per month, before any expenses are deducted.

Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

IRR
Internal Rate of Return is the rate at which the lender accounts for interest.

Margin Amount
Margin Amount is the difference between the total cost of the project and the loan amount sanctioned. This money has to be invested by the borrower prior to the release of the loan amount.

Market Value
This is the value of the property as per the prevailing market value.

Maximum amount
This is the maximum amount financed by the bank for a given scheme.

Minimum amount
This is the minimum amount financed by a bank for a given scheme.

Obligation
The borrower in terms of the agreement will be obligated to keep up the schedule of repayment to deposit the post dated cheques periodically.

Partnership
Partnership is joint or several ownership of a business with the liability of the partners.

Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date

Prepayment Charges
Most banks charge some fee for pre-payment of loan before the tenure is over. The fee is normally in the range of 1-2% of the pre-paid amount.

Principal
The amount of  debt, not counting interest, left on a loan.

Processing Fee
It is a one time fee which is normally non-refundable and is payable before your loan is disbursed. The rates may vary from 1-2% of the loan amount.

Proprietorship
Single ownership of a business

Reducing Basis
Reducing balance is the method of reducing the principal amount repaid, from the outstanding loan amount. Every time you make a payment, the interest you pay is calculated on balance outstanding principal. The reducing balance can be of 4 types: daily, monthly, quarterly and yearly.

Refinance
Loan/Additional loan financed on an existing asset/product .

Role of Guarantor
The role of a guarantor is commitment by the way of agreeing to the terms and conditions of the loan and liable to the extent of the loan/liability together with the interest and other charges.

Rest
A contradictory word here as it does nothing but increase your tension. Interest rates are quotes on a daily rest, monthly rest or annual rest basis. The annual rest quote implies that the company gives you the credit for the monthly principal repayments only at the end of each year. Such loans are therefore more expensive than a monthly/daily rest loan. The shorter the tenure of the loan, the greater the effective interest rate difference will be.

Sanction Letter

A letter communicating the sanctioned terms and conditions, once the loan is approved.

Statement of Account
The statement indicating the outstanding loan amount, the amount paid by the borrower, the appropriations made towards the interest and principal etc. at the end of the financial year.

Tenure of the Loan
The total time period in which one has to repay the loan. Normally, loans are given for a period of 6 to 60 months.

Total Initial Payment
Initial payment made by the customer when the asset is purchased and includes service charges and advance EMI`s if any

Valuation
Process to evaluate the worth in money of an asset/product

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